The scandal that marred Ronald Reagan's presidency was rooted in two separate military initiatives in which American involvement was prohibited by federal law.

The first was the ongoing war between Iran and Iraq. Officially, American foreign policy took no sides in the conflict; however, secretly, officials at the National Security Council (NSC) were selling weapons (at heavily inflated prices) to Iran. This was done in exchange for Iranian assistance in negotiating the release of American hostages held in Lebanon by pro-Iranian terrorists.

Secrecy was necessary for a number of reasons. First, the arms deal was illegal, violating a U.S. trade and arms embargo against Iran. It also clearly subverted the Reagan administration's policy not to negotiate with terrorists. And finally, profits from the operation were being used to fund another conflict, that of the Contra rebels in Nicaragua, who were trying to overthrow the Marxist Sandinista government.

Reagan had pledged to support the Contras, but in 1983 the dominant liberal Democrats in Congress passed the Boland Amendment, which prohibited the Defense Department or any U.S. intelligence agency from funding the Contras. The Reagan administration got around the law by using the National Security Council to provide the aid. NSC staff member Lt. Col. Oliver North was the White House official most directly involved with selling arms to Iran and diverting the proceeds to the Contras. He continued to funnel money to the rebels until Nov. 1986, when his activities were discovered and he was fired.

In March 1988 Robert McFarlane, who was national security adviser from 1983 to 1985 and North's boss, pleaded guilty to withholding information from Congress concerning the aid being given to the Contras. He was later fined $20,000 and given two years' probation. Oliver North and John Poindexter, McFarlane's successor at the NSC, were convicted on several counts, including obstruction of congressional inquiries. Ultimately, neither served any prison time, however. Their convictions were set aside on the grounds that their immunized congressional testimony had unfairly influenced the juries at their trials.

President Reagan and then-Vice President Bush both denied detailed knowledge of the scheme and were never connected to any specific crime. In what has sometimes been seen as a cover-up, President Bush in 1992 granted pardons to six officials involved in the scandal, including McFarlane and Secretary of Defense Caspar Weinberger, who was accused of lying to Congress about his knowledge of the arms-for-hostages deals. The pardon meant that Weinberger did not have to testify regarding the involvement of senior Reagan administration officials, including Bush.